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  • what is Options Trading ??

    Options - A Simple Explanation

    Hey Guys,

    I got a no of emails asking me about the options traidng. Options trading is really like the next step in stock market. everybody first learns stock trading and then gets interested in options. Overall Options are highly risly but heavily rewarding if done right. let me be clear, if you want to do options trading, you must have margin trading account.

    But what are options.I will try to explain thsi by giving an example. Say that I want to buy a house and you want to sell your house. You're asking $100 K for your house. I (the buyer) really like the deal, but need to check elsewhere before I commit to buying your home for $100K. So let’s say that you decide to sell me an option that gives me the 'right' to purchase your home at a stated price of 100K. And for selling me that 'right', I will pay you $1,000. Also in this contract, you state that this option will only be good for 6 months. If during the 6 month period, I (the buyer) do not notify you that I intend to exercise or use my option to buy your house at the stated price of $99K, the option expires worthless and ceases to exist.

    In this case, I would have forfeited the $1,000 that I paid to you for the option. Meanwhile, you, the option seller, gets to keep the $1,000. Now let’s say that two months later, home prices in your neighborhood suddenly rose in anticipation of the building of a mega-shopping mall. In this case, your house is now worth $120K. Remember that I still have the right to buy your house at $100K. I can now either exercise my option or I can just sell it. I could exercise my option and purchase your house at the stated price of $100K and immediately sell it for $120K, thus netting a $20,000 profit ($120 - $99K - $1K). Or I can sell my option to someone else for at least $21K.

    So I earned 20000 profit by investing just 1000. Thats 20 times the money. This is just an example.

    So the Citigroup option we discussed earlier works the same way. You can purchase the citi group option of $ 5 by paying say $ 0.35 and if the price of C rises to 5.70, you double your money. Also even if the price has not reached 5.70 yet but has rised to 5 and the price of $ 5 option may have reached to say 0.55 or 0.60, so you can sell your contract for 0.55 which you bought at 0.35. Think about the Profit.

    Do research about it. Its not that easy but not that difficult even. I think this is enough to digest today. we will be discussing it more on HotStocksEveryday.com
    God Bless,
    Be Rich


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